CID's interview with Dr Pei about China and its Natural Resource Strategy

· china,mining,research

China is one of the world's leading consumers and producers of natural resources. With so much of the world's supply and demand concentrated in one country, it is crucial to analyze both its natural resource strategy and the degree to which it has successfully used its natural resources for development.

We refer to the CID's interview with Dr. Minxin Pei, an expert on governance in China and Chinese political development, in this article. CID met Dr Pei this February to discuss the most important trends in China's energy, agriculture, and mining industries.

Dr. Pei is the Director of the Keck Center for International and Strategic Studies at Claremont McKenna College, a non-resident senior fellow at the Asia Program at the German Marshall Fund of the United States, and a frequent contributor to publications including The New York Times, Foreign Policy, The China Quarterly, and China Today. His latest research focuses on corruption in Chinese politics. Dr. Pei received his PhD and MA in Political Science from Harvard University and a BA in English from The Shanghai International Studies University.

Below are some highlights of this insightful interview with Dr Pei about China and Natural Resources. You can read the full transcript of the interview here.

CID: China is rich in minerals and has attracted foreign investment to develop its mineral resources. Considering this fact, what role does China’s investments in other parts of the world, such as Africa, play in their development strategy?

Pei: It’s a supply question. They don’t trust the spot market and want to depend more on long-term supply agreements. With market forces you pay more and there is a lot of volatility. They also believe that equity investment insures security. That is their thinking. So if they develop a mine in Africa, for example, they want some kind equity investment or a long-term agreement to secure that supply of resources.

CID: Do you think China’s foreign investments in natural resources is a good strategy for its development, or do you think it should be focusing more on its domestic resources?

Pei: Well I think the simple math for China is that it doesn’t have enough stuff at home, so it has to go out. The key question then becomes, how do you secure access? Do you do it through the market, or do you do it through non-market means? China opted for the latter.

There are clearly huge financial and political consequences to this strategy. So far, China has been ready to absorb these costs because this strategy also has non-monetary benefits: how does one value security? So far their model of long term contracts and equity investments to improve security has not been proven wrong, considering that there hasn’t been a resource supply shock. We will have to wait for a supply shock to see if China can successfully go to their partners and demand supply.

CID: One of your research focuses is corruption in China. What is the role of corruption in the Chinese natural resource sectors?

Pei: It is one of the most corrupt sectors because natural resources have huge rents. In my book, China's Crony Capitalism, I talk about a lot of coal and metal mines and energy projects that have been mired with corruption problems. I think this is because they have all the right ingredients for corruption: they are state owned and thus the state can allocate natural resources, so if you have connections you can secure a lucrative project for almost nothing. The state can choose the winners and losers.

CID: Overall, what grade would you give the CPC in terms of its ability to use China’s resources for development?

Pei: I would give them a B: they could do better, but they could certainly do much worse. So average.

CID: Where should China invest the revenue it gains from resource production?

Pei: What is interesting about this question is that almost all of their resource revenues goes into production or consumption. Therefore, they do not look at natural resources from a financial perspective, but rather a purely supply and demand perspective. They are not stocking up natural gas and oil with the intention to flip the supply for profits later, for example. It is not a traditional model of a government collecting revenue on production, developing a surplus of revenue, and investing that surplus elsewhere.

CID: What would you say are the most important trends in Chinese political economy that will affect its management of its natural resources?

Pei: I think the biggest trend will be if they switch from a consumption driven model to a more investment driven one, there will be a fall in demand for certain natural resources. There will be more demand for gas, less demand for oil, especially if the EV sector takes off. But I wouldn’t put my money in iron ore, for example, or steel. The demand for rare earth metals, however, should go up based on technological demands. It is all dependent on the structural changes in the Chinese economy.

We thank CID for publishing this informative and insightful interview.